Many people have made a killing from investing in stocks, and it thus suffices that more people would want to do the same. The only way to gain financial independence from stock investing is to understand how it works. Without this fundamental understanding, you would be gambling with your money. Let’s get started on the basics:
What are stocks?
When a company decides to go public, it makes its shares available to the public such that anyone can purchase these and have a stake in the company. These shares go by the name stocks, and investors buy and sell these at will.
As an investor, your goal should be to buy stocks when they are undervalued compared to their actual (potential) value. You then hold on to the stocks until they achieve their actual/ potential value before selling them.
For example, a year ago (January 29th, 2020), a stock in Etsy was going for $59.50. As of January 28th, 2021, the same stock goes for $202.41. Thus, anyone who bought the shares a year ago is now looking to make a tidy profit. Suppose someone had 1,000 shares in Etsy bought at $59.50 and sells them at the current rate of $202.41; the profit margin will be $142,910 or thereabout.
What determines stock prices?
At first, the value comes down to the investment bank used to value a company’s shares at the time of the initial public offering. This value is based on the company’s value and the current interest from investors before the company goes public.
Once the stocks are in the market, their prices are subject to their demand and supply. If the company is doing well and people expect it to do better over time, they will demand more shares. The more greed for a stock, the higher its price will be. On the other hand, where a company seems to be doing badly, or there are concerns as to its future growth, the stock price will fall. Fear drives down the prices while greed increases the demand.
Let’s take an example of Zoom technologies. When COVID hit, more people were forced to work from home, leading to the increased use of video conferencing software. The company’s stock price has moved from $73.58 since January 28th, 2020, to $378.59 on January 28th, 2021. The need for the company’s software coupled with the COVID pandemic worked well for this giant. At the same time, there have been fears that the company might not do so well post-COVID, leading to a fall in stock price. As of October 19th, 2020, the stock price was $568.34, which has now come down to $378.59 by January 28th, 2021.
By now, you get the gist of what goes into stock investing. Now, how can you make sure you get the most out of your investment?
- Stick with companies you understand- the more you know about a company, the easier it is to forecast how well it will do in the future.
- Research the said companies and figure out how they have been doing. Having a wealth of knowledge reduces your risk exposure. Keep in mind that stock prices can fall suddenly owing to a slight change in the market. StockInvest.us can help you keep an eye on any companies you have in mind, giving you an idea of how well they are doing at any given moment.
- Bid your time- it can be quite easy to jump onto the first opportunity you see. Please refrain from doing this and instead, carefully watch your chosen companies and see how they do for a few months.
- Do the math and calculate your potential return on investment, sales growth rates, and earnings on the said company’s shares.
- Strike- once an event causes the market values to drop below the real value of the stock price, start buying stock as long as the aspects above check out. As long as the company’s value is stable, even if the stock prices fall, they will be sure to increase in value. Take advantage of the panic and buy from the panicking investors at a discount.
Stock investing comes down to two main motivations- greed and fear. Knowing when to take advantage of each emotion will help you stay afloat and avoid losing your hard-earned money.